RFF's Social Cost of Carbon Initiative

Work by RFF experts will update and improve estimates of the social cost of carbon and inform its use in benefit-cost analyses of policy options and other actions that affect greenhouse gas emissions.

The social cost of carbon is an economic tool used to quantify the societal benefits of reducing —or conversely the damages of emitting—one ton of carbon dioxide emissions in the atmosphere. The estimate informs billions of dollars of policy and investment decisions by federal and state governments, as well as businesses, so it is critical to use the most current and informed value possible.

The US federal government, for example, has used the social cost of carbon to account for the effects of its actions on climate change in over 150 proposed and final regulatory measures, including land use decisions and standards for vehicle fuel efficiency, power plant emissions, and appliances. The estimates and methodology used by the United States have been adopted in full by the Canadian government. In New York and Illinois, the social cost of carbon serves as the basis for the value of “zero emission credits” paid to utilities under state clean energy legislation. In Colorado, utilities are now required to use the federal social cost of carbon in their resource planning. The estimation methodology is also being considered for adoption by the Mexican government and by regulatory agencies in California and Minnesota.

At the request of the US ­federal government, in January 2017 the National Academies of Sciences, Engineering, and Medicine (NAS) released a comprehensive review of options for updating the methodology for estimating the social cost of carbon. The report made a number of key recommendations to ensure that the estimates reflect the best available science and to enhance their transparency. RFF is leading a multi-year, multidisciplinary research initiative that will advance the NAS recommendations and lead to a comprehensive update of the social cost of carbon estimates, as well as enhance the capabilities of decisionmakers and analysts worldwide who use the social cost of carbon to measure the benefits of emissions reductions.

Key Elements of the Initiative

Transitioning the current estimation process to an integrated framework, built on an open source, computationally efficient, publicly accessible, and clearly documented computational platform

Revising the socioeconomic projections of population growth, economic activity, and emissions to better reflect key uncertainties

Adopting an updated climate model that passes well-defined performance tests of its representation of current climate science

Updating the climate damage functions that translate climate impacts into monetary values to reflect the current state of the peer-reviewed literature

Incorporating a discounting procedure that integrates socioeconomic projections and explicitly recognizes the uncertainty surrounding discount rates as well as the interrelationship of uncertainty in discounting and economic growth—and, in turn, societal damages from carbon dioxide emissions

Convening domestic and international government entities and businesses and conducting educational outreach on using estimates of the social cost of carbon in order to facilitate more informed policymaking worldwide

The Trump administration’s announcement on plans for moving forward with the repeal of the Clean Power Plan obviously reaffirms its position that the Obama administration’s approach on climate was too aggressive. It is therefore important to assess the administration’s arguments for why the Clean Power Plan represented federal overreach.

Reconciling domestic and global estimates of the social cost of carbon will be a necessary challenge to construct effective climate policy, especially to the extent that other countries look to the United States for climate leadership.

Considering Trump’s rollbacks of US climate-related policies, applying the best available science to estimate the social cost of carbon and assess the impact of carbon dioxide emissions will require significant effort from the broader research community.

A report released last week by the US National Academies of Sciences, Engineering, and Medicine (NAS), recommends an updated methodology for calculating the social cost of carbon (SCC)—a metric used to estimate the net value of global climate change impacts that result from carbon dioxide emissions.

In new research (described in an earlier blog post), we lay out a legal argument for how the Bureau of Land Management (BLM) might implement a carbon pricing policy, based on the social cost of carbon, on coal extraction on federal lands (with RFF coauthors Joel Darmstadter, Nathan Richardson, also of the University of South Carolina School of Law, and Katrina McLaughlin). As we mentioned previously, BLM has a mandate to manage public land in a way that provides for multiple uses.

A national tax on carbon emissions would offer an opportunity for deficit reduction and/or tax reform, as well as climate change mitigation. Economists studying taxes on environmental harms, such as carbon emissions, often suggest that the tax be set according to the damage inflicted by the last unit of emissions.

Imposing a carbon tax on electricity production based on the social cost of carbon could generate between $21 billion and $82 billion in revenues in 2020 and would have important effects on electricity markets.

Some recent posts examining estimates of the social cost of carbon (SCC) noted that the SCC applies to the world as a whole: it is the global concentration of CO2—irrespective of the geographic origin of emissions—that prompts concern over climate change. How does that fact translate into costs facing one or another CO2-emitting country?

The US government’s new consensus estimate of the social cost of carbon (SCC)—around $43 per ton of CO2 from a 2020 baseline—has met with some approval in academic and other circles (as we discussed yesterday). But some of the harshest criticisms, at least insofar as the blogosphere would interpret them, have come from MIT economist Robert Pindyck (short article and working paper).

In 2009, an interagency workgroup composed of members from six federal agencies and various White House offices was convened to develop estimates of the “social cost of carbon” for regulatory impact analysis. This process represents a step forward in increasing transparency and consistency in benefit–cost analyses of federal regulatory actions and can serve as a model for future revisions of the social cost of carbon estimates to keep pace with the evolving state of the science.

In the News

"Resources for the Future, a 65-year-old policy research organization based in Washington, launched a three-year effort in June to update and maintain a central element of climate economics, known as the social cost of carbon.

The measure is an estimate in today’s dollars of the projected economic impact of climate change -- elements that could include, for example, the health risks associated with air pollution or the cost of coastal flooding from rising sea levels. RFF estimates that every metric ton of carbon-dioxide pollution represents roughly $40 in future damage. In 2017, the world released an estimated 37 billion tons of CO2, a 2 percent increase over the previous year."

"But the new administration's revised calculations involve methods that largely ignore those recommendations, according to Richard Newell, co-chair of the committee that released that report and president and CEO of think tank Resources for the Future.

For one thing, the lowest value presented in EPA's report relies on the use of a higher discount rate than was applied in the Obama-era calculations. In simple terms, a higher discount rate results in a lower social cost of carbon and vice versa, and there's been considerable debate about what rate is appropriate. The previous estimate of $42 relied on a rate of 3 percent, while the revised calculations' lower estimate of $1 uses a rate of 7 percent, which some experts say is too high.

'There are good reasons to think that such a high discount rate is inappropriate for use in estimating the SCC,' Newell wrote in a blog post."

"While Dudley sees flaws with the Obama administration's social cost of carbon, she urged the Trump administration to consider reconvening the working group it had just eliminated rather than leaving the task of coming up with the next value to outside groups. Such groups already have stepped up since Trump's announcement, including the nonpartisan Washington, D.C.-based think tank Resources for the Future, which launched an initiative in June to update the social cost of carbon in line with new research."

"California is also considering using the cost of carbon as part of its comprehensive energy and climate programs. All told, the United States government utilized the social cost of carbon in more than 150 proposed and final regulatory measures, according to according to energy and environmental policy think tank Resources for the Future (RFF). And support gained momentum when Colorado became the first state to impose a regulatory requirement that utilities use it in resource planning.

But that momentum was lost when a presidential executive order disbanded the working group in March. President Donald Trump’s order also specified that the social cost of carbon is no longer governmental policy, wrote RFF Fellow Casey J. Wichman. Its rollbacks and guidance 'indicate that the Trump administration is disengaging from scientific questions related to the benefits of emissions reductions.""